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Fed keeps easy money flowing for now

The Federal Reserve agreed to continue its extraordinary bond-buying program to hold down borrowing costs for consumers and businesses, though many economists expect the stimulus to be scaled back this fall.

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Noting that the economy has weakened recently, the Federal Reserve agreed Wednesday to continue its extraordinary bond-buying program to hold down borrowing costs for consumers and businesses.

Although many economists expect the stimulus to be scaled back this fall, the Fed's warier economic outlook raises the risk that a reduction in the bond purchases could be delayed.

In a statement after a two-day meeting, the Fed said the economy has expanded "at a modest pace" the first half of the year. In June it said the economy was growing "at a moderate pace." Fed policymakers also said persistently low inflation -- it's running just above 1% -- "could pose risks" to the economy. Such risks include deflation and recession, though the Fed anticipates inflation will drift up to the Fed's 2% target "over the medium term."

And the central bank noted that mortgages rates "have risen somewhat," a development that some economists fear could dampen the housing rebound.

“There is nothing . . . to suggest that Fed officials have changed their minds about starting to taper the monthly asset purchases September.”

Paul Ashworth of Capital Economics

The government said Wednesday that the economy grew a better-than-expected 1.7% in the second quarter but it revised its estimate for first-quarter growth to 1.1% from 1.8%. Meanwhile, fixed 30-year mortgage rates have risen to 4.31% from 3.35% in early May.

Despite the slightly downgraded outlook, many economists still expect the Fed to begin dialing back its stimulus in September, largely because job growth remains solid and the economy is projected to gain momentum later this year. In its statement, the Fed said it expects "economic growth will pick up from its recent pace."

"There is nothing . . . to suggest that Fed officials have changed their minds about starting to taper the monthly asset purchases in September," Paul Ashworth of Capital Economics said in a research note.

But Martin Schwerdtfeger of TD Economics says the Fed's dimmer view of the economy "marginally" reduces the odds that it will taper the bond-buying in September.

The Fed is buying $85 billion a month in Treasury bonds and mortgage-backed securities to contain long-term interest rates and spur more home purchases and other economic activity.

Last month, Fed Chairman Ben Bernanke said the central bank likely would begin paring back the monthly purchases later this year and end them by mid 2014 if the economy and labor market continue to improve.

Bernanke also has said a pull-back in the bond-buying would be put off if the economy and job market teeter over the next few months amid federal budget cuts and a January increase in payroll taxes.

Despite weak economic growth, payrolls have grown solidly this year and the housing and auto markets have continued a strong recovery. Most economists recently surveyed by USA TODAY expect the Fed to begin to trim the bond purchases in September or October.